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2014 U.S. Economic Growth

Sequester is Hurting

By Swagato Chakravorty
Friday, June 28th, 2013

In news that is unlikely to be welcomed by domestic markets here in the U.S., the International Monetary Fund has just slashed growth forecasts for the nation. The forecast for 2014 is now down to 2.7 percent from April’s estimate of 3 percent, reports the International Business Times.

manufacturingSomewhat expectedly, the recent sequester was found to be the biggest game-changer. According to the IMF, that whole episode resulted in overall economic growth slowing to 1.9 percent. This could have been as much as 1.75 percent higher had the sequester never gone into effect.

From the IB Times:

"The deficit reduction in 2013 has been excessively rapid and ill-designed," the IMF said. "These cuts should be replaced with a back-loaded mix of entitlement savings and new revenues, along the lines of the [U.S.] administration's budget proposal."

Meanwhile, government debt is expected to go up to 110 percent of the GDP before starting to fall by 2015. The main point the IMF made was that the U.S. Federal Reserve ought to keep its stimulus program going until at least 2014.

If you recall, the general figures are good; the domestic housing market appears on the upswing, both corporate and household finances are improving, and unemployment numbers are improving too. However, as has been pointed out numerous times, this improvement rides in large part upon the success of the Fed’s asset-purchase stimulus program.

That program has not only stimulated this multi-pronged growth; it has also helped keep interest rates down at historically low levels. That, in turn, has promoted investment and the circulation of money back into the economy. That’s why the IMF is keen on the Fed’s program remaining in effect until all seems clear.

This should present an interesting counterpoint to Bernanke’s recent remarks regarding the beginnings of a taper-off of the Fed’s stimulus programs. Those comments did lead to minor shocks in the market, with numerous indicators dropping sharply.

Two other Fed presidents waded in, pointing out that the Fed will undoubtedly monitor market responses carefully and adopt a highly accommodative tack as it proceeds with the wind-down of its stimulus program. Moreover, it was made amply clear that any such winding down would be done in a very gradual manner.

Nonetheless, there is a strong likelihood the Fed’s action may come prematurely. If that happens, it’ll send the markets reeling all over again. According to the IMF, at least, the Fed needs to keep the stimulus going until this year’s end.

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Domestic Growth to Improve Through 2014

However, it’s not all doom and gloom. Following a symposium organized recently by the Federal Reserve Bank of Chicago, it seems economic growth will increase just enough through this year and 2014 to bring down the unemployment rate to 6.9 percent by Q4 of next year. By the end of this year, that rate should have gone down to about 7.3 percent (April’s figures indicated an unemployment rate of 7.5 percent).

Reuters reports that the survey’s respondents arrived at a consensus of economic growth at the rate of 2.9 percent through 2014. That’s only slightly more optimistic than what the IMF has indicated.

In the meantime, the Fed is committed to continuing its stimulus program, under which it buys up $85 billion every month in Treasuries and mortgage-backed securities. In the survey, inflation was projected to drop to 1.8 percent through this year (based on the consumer price index). Next year is when we should see inflation rise back up to hit the Fed’s target of 2 percent.

A sense of optimism is mirrored—and even amplified—in the mind of Ed Keon of Prudential’s Quantitative Management Associates. CNBC reports that Keon expects as much as 5 percent economic growth through the later part of 2014.

Keon also feels the tax increases and other adjustments through this year have had an adverse impact on growth—nearly 2-3 percent is his claim—but the coming year should see gains in these areas. Also, Keon underscores the near-10 percent rise in state and local government tax collections from Q1 this year, citing them as an example of places that will contribute toward improving the GDP.
Lastly, he expects a snowball effect of sorts; the continued modest growth today will spiral into more emphatic growth as key indicators continue improving through this year and the next.

 

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